Yesterday started out with a VIX-driven pop that quickly fizzled and nailed our downside target before rebounding and hitting our upside target. Since SPX closed right at resistance, it needed a boost overnight. So, why not go back to the same clever trick that worked the day before?
Yes, VIX’s red channel has broken down again. And, the algos are eating it up… to the tune of +5 on ES.
Will it pop and drop, again, or will this one take?
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After SPX’s break out on the back of a 37% plunge in VIX, it’s no surprise that the VIX has kept it within striking distance of new all-time highs.
In dropping that 37%, VIX completed a deep retracement of its rise from 9.97 — the lowest it’s been since 2007 — to 16.28. 
The .886 retracement is considered the last stop before prices drop through the previous lows. Imagine: risk being considered lower than at any time since 2007!
Yesterday, VIX spent the entire day dancing around that .886, with a dip below it every single time SPX started slipping. The message to algos was that VIX was about to drop to new lows and, therefore, stocks should be bought.
It was enough to keep SPX from completing a simple retracement from its .886 to its .786, or any meaningful dip until the final minutes of an otherwise nonsensical session.
Today’s a new day, as CL is closing in on our 48.35-48.45 target and investors are no doubt anxious to express their disappointment with the lack of details provided for the fantastic, big-league tax cuts “revealed” yesterday.
Despite the slight bump in futures overnight, our downside targets remain intact – starting with 2384.
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As we noted yesterday, SPX is hanging on by the skin of its teeth to a breakout. Despite an 18-pt intraday plunge, it recovered by the end of the session thanks to a timely decline in VIX and rally in WTI. 
Will it be enough to keep the trend intact?
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The daily candle is close enough to the yellow channel bottom to call it a save. 
But, futures are off several points again this morning. 
And, VIX is on the rise — likely headed for our target at 16.25 – 16.48.
But, USDJPY has reached the white channel bottom ahead of the SMA200 and could get a bounce for a few days.
It will need to clear the 109.75 price level to be of any help.
I suspect this is all designed to allow ES to tag support on this little red channel as well as the larger red channel. If it doesn’t hold, the falling white channel suggests another 20+ points of immediate downside.
If it holds, SPX should bounce from right here and recover to test the IH&S neckline over the holiday weekend. Aside from the purple TL, the other key level is the SMA5 200 at 2354.95 — which is very close to the yellow neckline (which has yet to be properly backtested.) I would want to be long here with very tight stops.
Here’s SPX with the same falling white channel as ES sketched in. Clearly, yesterday’s reversal at 2337, which occurred a few points shy of our 2334-2335 target (yellow) was a little premature. It leaves open the question as to whether the bounce was off firm enough support.
UPDATE: 10:01 AM
SPX is struggling to remain above its SMA50. USDJPY and CL aren’t helping much, though VIX is falling just enough to keep it above the purple TL — now around 2348.80.
Remember, we have an EIA crude inventory report coming out at 10:30AM. CL has been steadily approaching the .886 at 54.11 for the past two weeks, and yesterday’s API report was bullish.
Stay tuned…
UPDATE: 10:32 AM
The EIA says crude inventories decreased by 2.2 million barrels. 
The bad news, however, is that Cushing is at all-time highs — 69.4MM versus capacity of 77MM barrels.
CL spiked higher for a moment, but is back to its .786 Fib. SPX is following its lead, and dropping through the purple TL. I’d revert to short on any drop through the SMA5 100 at 2348.76.
CL is slipping, and looks like it wants to tag its SMA5 200 at 53.19. It would be enough to knock SPX off trend, so it’s a little tricky. If CL drops through the SMA5 200, it’d be quite negative for both CL and SPX.
VIX is keeping SPX afloat…
…and USDJPY is still playing its cards close to its vest.
UPDATE: 10:38 AM
SPX is slipping below the purple TL, but has so far just head-faked 5 separate declines below the SMA5 100. If CL gets a strong bounce off its SMA5 200, it’ll set up another head fake. Even so, it makes me nervous to hold long as it keeps testing the SMA5 100. Keep your stops where you’re comfortable.
UPDATE: 10:44 AM
I’ll probably be right back to long, but I’ll revert to short here. CL is struggling with its SMA5 200 and USDJPY might not hold its red TL.
A drop through 53.29 would be bearish and open it up to 51.6 or lower.
Note that ES’ red channel has completely broken down.
UPDATE: 11:07 AM
A bounce off the white midline makes sense. We’ll have to see what happens, thought, when it reaches the SMA5 10 at 2347.80. If it pushes through, everything’s a go for the SMA5 200 tag and yellow neckline breakout. If it can’t, then 2334.26 is in view.
At the current rate, it could reach the .786 without tagging the bottom of the falling white channel — if it’s willing to wait a while. Note that the channel’s .236 line reaches 2335 a little after 3pm this afternoon.
UPDATE: 11:42 AM
ES just reached the midline of its falling white channel, which could provide support even though SPX doesn’t show much.
UPDATE: 11:58 AM
Now, SPX has tagged its midline, too. I’d expect a bounce here, though it could be confined to the SMA5 10 around 2344. Note, though, the SMA5 200 is approaching the purple TL. A huge bounce would make that a target — though it seems unlikely.
CL has broken down below the .786 and SMA5 200. So, this entire decline feels very much managed/engineered — meaning there’s a purpose and a target which is below current levels.
UPDATE: 12:09 PM
12:09 — often a turning point in bounces — and SPX just backtested its SMA5 10. I’d look for a reversal here, but keep an eye on USDJPY and CL.
UPDATE: 12:21 PM
SPX is nudging up through the SMA5 20 on VIX weakness and USDJPY strength. But, CL continues to falter. And, VIX has bounced at the SMA5 50 three times in a row. I’d hold short here.
UPDATE: 12:51 PM
VIX is getting a nice boost, but our 16.25-16.48 target isn’t that far off. SPX should continue dropping, but I’d keep a close eye on VIX and USDJPY, which is testing its SMA5 200 again.
I have to run a quick errand, will be back in 10 minutes or so. Watch for TL support at 2341.78, the 1.618 and .786 at 2334.26-2335.34, and the .886 at 2328.65.
UPDATE: 1:03 PM
SPX just tagged TL support at 2341.78 and got a nice bounce. Bears need the bounce to stop right here. Will CL be satisfied with a backtest?
UPDATE: 1:14 PM
Giving it just a little leeway in case the .886 is the target. My only hesitation is USDJPY, which has pushed above its SMA5 100 again. On the other hand, VIX has tagged the SMA5 50 for the 4th time. The fact that it hasn’t plunged down to the SMA5 200 or below tells me this is probably an officially approved and scripted decline.
UPDATE: 1:40 PM
SPX is breaking out on VIX’s dip below red TL and USDJPY’s push above the purple TL. Back to cash until this resolves itself. Remember, VIX has support at the purple TL and the SMA5 200 around 15.35. If it drops through the SMA5 200, SPX has a good chance of reaching its own SMA5 200 — perhaps as it reaches the SMA50.
UPDATE: 2:01 PM
Feeling pretty iffy about it, but we could get a reversal here at the SMA50 rather than the SMA5 200 as it’s also the white channel .786 line. Back to short with relatively tight stops.
Note that ES has fully backtested the red channel.
UPDATE: 2:10 PM
Note that USDJPY is back below the purple TL. I need to run out for a meeting and probably won’t be back until after the close. I think there’s probably a 50% chance that SPX holds these levels until the SMA5 200 arrives at the SMA50 at 2349.60. It’s equally likely it reverses between here and there and heads down to 2334 or 2328. As long as it stays below 2350, I’d want to be short.
UPDATE: 2:51 PM
TL support, again.
UPDATE: 3:20 PM
USDJPY just snapped, sending VIX surging and CL popping to compensate. SPX is down to the white midline again, where it could bounce. VIX might have one more good run in it up to 16.25+; but, they might be looking to close the session at that SMA50/SMA5 200 intersection. I’d want to revert to cash above the SMA5 100. As usual, shorting overnight should only be attempted by those who can hedge or handle the gap risk. Watch your stops.
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Yesterday, we got a taste of what happens to United Airlines passengers who are “disruptive and belligerent.” In what is being described as one of the biggest PR fails in recent memory, United CEO Oscar Munoz defended the action taken to forcefully drag an Asian-American doctor from a flight that United had overbooked.
No doubt United would have found the volunteers it needed had it upped the compensation it was offering to $1,000, $1,500 or even $2,000. Instead, it will pay millions to the passenger, and many more millions in lost revenues from prospective passengers who are too horrified to “fly the friendly skies.”
The stock is likely headed for at least 61.72, a 14% drop from yesterday’s highs — about $3 billion off its market cap. And, that would be a positive outcome — if it’s able to hold both horizontal support and its SMA200.
While the event itself was shocking, it’s equally surprising that the CEO of a major airline could be so tone deaf as to email his employees that “I want to commend you for continuing to go above and beyond to ensure we fly right.”
The most interesting CEO on the world stage, right now, is our own Donald Trump. He faces much greater challenges than Munoz did: escalating military conflicts with both Syria and North Korea and, by proxy, Russia and China.
We’ve had a taste of Trump’s leadership skills with respect to the battles over health care, tax reform, and scores of executive orders relating to the environment, energy, etc. He won some, and he lost some. None of those, however, involved the risk of nuclear war.
Is it any wonder that investors are a little nervous and stocks have, so far, not shaken off this particular geopolitical risk?
On Feb 10, SPX broke out of a large, year-old channel that was averaging 17% YoY returns. It has backtested that channel top seven times in the past several weeks — including a serious plunge below it on Mar 27.
Today, it’s happening again. Will it survive this test? It might just depend on whether or not Trump survives his.
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Markets tend to moves higher on Fed minutes days, even if the news isn’t all that positive. It’s all about convincing investors that the FOMC has their best interests at heart — that all they’re worried about is making sure that stocks continue to rally.
Today’s session is slightly complicated, then, by ADP employment which came in much higher than expected: 263K versus 175K. Theoretically, this puts pressure on the FOMC to raise rates and/or trim their balance sheet faster than anticipated. But, central banks have many tools at their disposal to ensure that the complication doesn’t become a problem.
S&P 500 futures are up 6.5 points, but right to Fib resistance. 
Can the Fed spin a hawkish set of minutes into something positive for stocks?
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SPX and ES managed to hold key trend lines and channels yesterday, bouncing from just short of our downside targets to exactly where we expected. All it took was an 18.3% hammering of VIX — no problem for the Masters of the Universe (real subtle, guys!)
But, there was no breakout. There wasn’t even an overnight ramp job.
This somewhat validates our theory about the oil and USDJPY two-step, meaning we should be looking for a big, sudden move in the currency markets as soon as today.
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The first big Republican victory — the repeal and replace of the ACA — has morphed into reproach and retreat. The net impact: what does this failure portend for the rest of the Trump agenda and, thus, the Trump Rally?
Regular readers know that I’ve looked askance at this rally from the start [see: Why the “Trump Rally” is a Fraud.] It was born of a sharp reversal in CL, USDJPY and VIX — the key algo drivers. Momentum traders jumped on board as it rose. And, somewhere along the way, mainstream investors convinced themselves that the new and improved outlook justified an 18% rally.
But, live by the algo, die by the algo. The yen had to appreciate to compensate for higher oil prices. Higher US and euroland inflation necessitated a drop in oil and gas. And, front-running the Fed’s tepid response to spiking inflation was widespread. With the Trump Rally narrative in doubt, there were simply too many plates to keep spinning.
Futures are off 22.50 at the moment, leaving us some clues as to what to expect for SPX. But, the more important side of the equation is where do WTI and the USDJPY dip to?
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There’s an old expression that says “close only counts in horseshoes and hand grenades.” So, we spent most of the day yesterday wondering whether the day’s 2336.45 lows were close enough to our long-held downside target of 2335.34.
The tag was marred by premature reversals in oil and VIX. Did the guys working the algos not get the message? Or, were they just a little over-eager? Admittedly, it’s tough to nail a precise value in an index as unwieldy as the S&P 500. But, they went to all the trouble of engineering a backtest of a key Fib level. You’d think they’d care…
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Only a couple of years ago, central bankers became adept at repairing the damage done to stocks after big shocks. That changed with Brexit, when the strategy shifted to pushing stocks as high as possible before the damage was done… and, still doing all the requisite ramping after the fact.
They perfected the technique after the US election, turning a 5% overnight dump in the futures to a breakout above important resistance — where stocks remain, today.
It made a bold statement — that the market was resilient enough to weather a sea change in the political landscape. This week should be all about proving how resilient it is in a rising interest rate environment. Judging from the mild drop over the past week, investors are quite unconcerned.
Does this make sense, or are investors whistling past the graveyard?
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After allowing a six-session slump (that saw SPX nail our downside target), The Powers That Be can be forgiven for insisting on an overnight ramp job.
Last night, it was USDJPY pushing through horizontal resistance, VIX getting clobbered through three separate moving averages, and oil continuing a nice bounce off our 48.63 target. It should be enough to get SPX up over its SMA10 on the opening bell.
Since the bounce is mostly about oil’s “recovery,” we’ll focus today on what to expect over the next few weeks.
Oh, and for those of you who clicked on this post expecting to get their Debbie Harry fix, HERE YOU GO.
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